United States: Revised Disclosure Rules For Foreign Private Issuers

Co-written by Steven Guynn, John Clark, Jean-Marc Franceschi, Kevin Cramer and Andrew Reilly

In Release No. 33-7745, "International Disclosure Standards for Foreign Private Issuers," which was published in September 1999, the Securities and Exchange Commission significantly revised disclosure requirements for "foreign private issuers" by enacting amendments to Form 20-F. The new rules are mandatory for all Form 20-F filings for foreign private issuers with fiscal years ending after September 30, 2000. Accordingly, many non-U.S. companies with securities that are registered in the U.S. are now confronting the daunting task of making these major changes to their annual filings for the first time.

Form 20-F is the form on which foreign private issuers file annual reports under the Securities Exchange Act of 1934. The new Form 20-F requirements also apply to Exchange Act registration statements on Form 20-F as well as registration statements under the Securities Act of 1933 relating to offerings of securities that have similarly been modified and now contain disclosure requirements that in certain instances cross-reference to Form 20-F.

The new disclosure standards are based on the International Disclosure Standards for Cross-Border Offers and Initial Listings, adopted in 1998 by the International Organization of Securities Commissions ("IOSCO"), of which the SEC is a member. In promulgating the IOSCO standards, the objective of IOSCO was to develop a core set of nonfinancial disclosure provisions to serve as a basis for the adoption of an internationally accepted disclosure regime. The SEC incorporated into the new Form 20-F, for the most part verbatim, the language as well as the format of the IOSCO standards. While the IOSCO standards in certain circumstances require disclosure of information not previously required of foreign private issuers under the predecessor Form 20-F, in many instances the disclosure requirements under the IOSCO standards are generally comparable to the prior disclosure requirements notwithstanding the different language of the IOSCO standards. In the adopting release, the SEC has attempted to avoid potential confusion by clarifying in many instances where the wording differences of the new disclosure requirements in their view do not constitute substantive changes from the prior disclosure requirements.

The SEC adopted a long phase-in period for the revised disclosure rules to allow foreign private issuers adequate time to adapt to the new disclosure requirements. The revised disclosure requirements are mandatory for annual reports filed with respect to fiscal years ending on or after September 30, 2000, in the case of foreign private issuers with fiscal years ending on December 31; therefore, annual reports covering the year ended December 31, 2000 will be their first filing under the revised disclosure regime unless those issuers voluntarily chose to comply with the new requirements in previous filings. The new Form 20-F annual reports are required to be filed on or before June 30, 2001 for foreign private issuers whose fiscal year ends on December 31.

Preparation by an issuer of its first annual report under the new disclosure regime will require significantly more than simply updating the prior year's disclosure. In addition to certain additional disclosure requirements, the presentation will need to be reorganized completely to comply with the new form requirements. Additional disclosure requirements of the new Form 20-F that relate only to securities offerings on Forms F-1, F-2, F-3, and F-4 (as well as tightened requirements governing the staleness of financial statements), and modifications to the definition of "foreign private issuer" also covered in the adopting release, are not addressed in this memorandum.

The amendments to Form 20-F replace prior Items 1-14 of the predecessor Form 20-F, excluding Item 9A (Quantitative and Qualitative Disclosures About Market Risk), which has been renumbered as new Item 11, with 10 new items that track the wording of the IOSCO disclosure standards. The items previously designated as Item 15 (Defaults Upon Senior Securities) and Item 16 (Changes in Securities and Changes in Security for Registered Securities) have been retained and renumbered as new Items 12 and 13, although they have been rewritten to reflect "plain-English" drafting principles. Certain of the disclosures required by the new Form 20-F are not required in the case of annual reports. The major additional disclosure requirements provided by the new Form 20-F applicable to annual reports include:

• specific "risk factor" disclosure, which previously had been required of foreign private issuers in Securities Act filings relating to offerings of securities but not in annual reports or other Exchange Act filings (interestingly, U.S. reporting companies are not required to make this disclosure in Exchange Act filings);
• disclosure of beneficial ownership of more than 5 percent of each class of an issuer's voting stock (previously 10 percent beneficial ownership disclosure was required), as well as significant changes in the ownership percentage of major shareholders during the preceding three years;
• disclosure of share ownership (including option grants) of directors and officers on an individual basis (rather than on an aggregate basis, as was previously required), although for persons owning less than 1 percent of a class of shares, that person's individual shareholding may generally be omitted;
• disclosure regarding related party transactions, regardless of whether the issuer otherwise makes such information publicly available, as was previously the case;
• detailed disclosure of an issuer's articles of association or charter and bylaws (which may be incorporated by reference to previously filed Securities Act or Exchange Act reports, provided that such information has not changed);
• expanded disclosure of information concerning directors and members of senior management and information regarding certain board practices, as well as more detailed compensation information, to the extent otherwise made public; and
• significantly more stringent filing requirements for exhibits.

In addition to the foregoing, the revised Form 20-F does modify in minor ways the scope of disclosure previously required. For example, among other new disclosure requirements:

• certain additional line items are required to be included in the selected financial data information;
• required historical exchange rate disclosure has been expanded;
• certain additional historical information relating to the issuer's incorporation and general development is mandated;
• disclosure regarding the issuer's principal capital expenditures and divestitures in the preceding three full years through the date of filing, as well as information concerning principal capital expenditures and divestitures currently in progress, is required;
• an issuer must disclose the existence of environmental issues that may affect the use of its assets;
• greater detail regarding the issuer's liquidity and capital resources is called for;
• certain information with respect to the number of employees is mandated;
• disclosure of material changes since the date of the issuer's annual financial statements must be included;
• more detailed historical price information is required; and
• disclosure concerning the issuer's organizational documents and its material contracts must be included.

Because the mandated disclosure requirements of SEC forms are viewed as a minimum disclosure obligation, and pursuant to general concepts of materiality, reporting companies typically disclose more than what is expressly required by an SEC form. Accordingly, certain of the new disclosure requirements cover items that issuers have typically disclosed in the past. Nonetheless, it is important, to ensure full compliance with the disclosure requirements of the new Form 20-F, that issuers undertake a careful item by item review of the mandated disclosure items.